The Shanghai pilot Free Trade Zone (FTZ), unveiled with fanfare by the Chinese government last September, has been billed as China’s most important stab at economic liberalization since the country set up its first special economic zone in Shenzhen, north of Hong Kong, under Deng Xiaoping in 1980. It has also been labelled a threat to Hong Kong's hegemony as an international finance center.

The Shanghai zone forms part of mainland China's push to open up 18 areas of its services sector, including finance, to foreign investors. The 28 square kilometer zone covers four existing ‘special trade zones’ in the Pudong district, across the Huangpu river from Shanghai’s central Bund district.

In Hong Kong, however, they are taking the arrival of the FTZ in their stride. Speaking at the seventh annual Asian Financial Forum (AFF) in Hong Kong, Chan King-Cheung, editor-in-chief of the Hong Kong Economic Journal admitted that there has been a degree of negativity in Hong Kong about the FTZ, largely because of the fear it would enable Shanghai to supersede Hong Kong as Asia’s top international financial center. However he said such fears were overblown:

“We witnessed the process when factories migrated from Hong Kong to mainland China 30 years ago. That turned out to be not as bad as many people feared. The positive effect was the rise of the services sector in Hong Kong."

He argued the launch of the FTZs would in fact give rise to “many mutual wins".

In a separate media briefing held at the AFF, Hong Kong secretary for financial services and the treasury, Professor K.C. Chan (Ceajer Chan Ka-Keung) said the former British colony does not see the launch of free trade zones in mainland China as a threat. He said:

“They are presenting us with opportunities, not with competition.”

He added that Hong Kong was in a good position to be a "testing ground" for all China's renmimbi liberalization projects:

"Hong Kong always benefits from Chinese economic reform. When China opens up and becomes more market-based, it opens doors to Hong Kong business."

There is a real buzz around China's next phase of economic liberalization here in Hong Kong, with many hundreds of delegates cramming a special workshop on the FTZs on the second day of the AFF. Every time a new slide was presented, the entire audience instantaneously stood up to take a photograph of it using smart phones and tablets.

At the event, Jing Ulrich, managing director and vice-chairman Asia Pacific at JPMorgan Chase, said could hardly have been more positive about the arrival of FTZs, and she said that all of JPMorgan’s clients were “very interested” and keeping close tabs on the development. She added:

“The Free Trade Zone is, for us, part of a very promising trend – we’re seeing reform of many financial markets in China including IPOs and municipal finance.”

However she stressed that, as far as JPMorgan was concerned such reforms "needed to be accompanied by full convertibility of the renmimbi".

Professor Lin Jiang, deputy director of the Hong Kong, Macao and the Pearl River Delta Research Center at Sun Yat-sen University, said:

“This isn’t just about tax breaks and preferential leases; this is about trying to be more imaginative to attract interest of financial institutions.”

There was some speculation in the Hong Kong press last September that, with the birth of the FTZ and associated economic freedoms, China would also take a more relaxed attitude to the internet, lifting its blockade on the social media sites Twitter and Facebook - at least inside the zones. Jiang said:

“People were wondering if there would also be innovation and reform [in the area of free speech]. The answer from the Chinese government was a definitive no”.

The audience seemed less enthusiastic about these remarks.

Other cities and regions of China are also closely watching developments in Shanghai, as China intends to allow FTZs in other regions. Liu Wentong, director-general of the financial affairs office of the government of Guangdong province, told the AFF event that Guangdong’s biggest economic weakness is its lack of a meaningful financial services sector (he also mentioned serious pollution). He said that having an FTZ would remedy both issues:

"Guangdong is applying for an FTZ but we can’t tell when we’ll get it."

He also said Guangdong-Macau-Hong Kong co-operation would be a key characteristic of the putative FTZ. He said:

“There is huge potential for collaboration between Hong Kong and Guangdong, based on Hong Kong’s strength in commercial law.”

There are concerns that the pilot FTZ in Shanghai – described as by the China Daily as “a laboratory for financial experiments before they are rolled out elsewhere in China” – is taking longer to get off the ground than anticipated and about the absence of clarity on the future shape of regulation in the zone.

“After about three months of waiting and preparation, many foreign banks were left with very little to do in their new offices since most regulations were being worked out…”

Areas of concern included lack of clarity on capital account convertibility and the timetable of future regulatory reforms.

So far, Shanghai’s FTZ has proved to be more alluring to domestic than to foreign firms. Ai Baojun, the Shanghai vice-mayor who chairs the zone's board, said in November that about 1400 companies had registered in the zone but only 38 of these were foreign firms.